Uber’s $1.2 billion funding round also poses big challenges

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FILE – In this April 29, 2014 file photo, Uber CEO Travis Kalanick arrives at the 2014 TIME 100 Gala in New York. Despite recent bad publicity over privacy violations and other problems, the ride-hailing app Uber has raised $1.2 billion in its latest round of funding from venture capitalists, valuing the company at $40 billion. (Photo by Evan Agostini/Invision/AP, File)

And news of the funding most likely elicited high-fives throughout the Uber empire, since the investment — Uber’s second of that size in six months — values the 5-year-old startup at $40 billion, making it the most valuable startup among all venture-backed private companies. It also means San Francisco-based Uber is now worth more than Tesla, Salesforce, LinkedIn, Twitter and Netflix.

But the big-dollar valuation sets up even bigger expectations that the ride-service app company may struggle to meet, particularly as it prepares for an initial public offering as early as next year, according to analysts and venture capital experts.

“They are clearly trying to say, ‘We are the hottest startup in the world, no one can touch us,'” said Sam Hamadeh, founder and CEO of research firm PrivCo. “But they may find themselves in a bind later on, when their IPO becomes overpriced.”

With the massive investment, the pressure is mounting for the startup to grow into a global car-booking firm unmatched by any competitors and become a publicly traded company with a blockbuster IPO.

Uber, which makes a smartphone app that dispatches a car to a passenger’s location, is available in more than 250 cities in 50 countries, and said in a blog post that it is six times as large as it was one year ago. With its new investment, Uber says it plans to expand its services in Asia and expects to add millions more passengers next year.

“By raising this amount of money, they are setting themselves up to be the next Facebook,” said Aswath Damodaran, a professor of finance at Stern School of Business at New York University. “Does Uber have the potential to be the next Facebook? Absolutely. But keep in mind the first big disrupter might not always be the winner.”

Uber didn’t disclose the names of investors, but with a round this large, experts say they are probably large banking institutions and hedge funds looking for a quick return through a speedy IPO. Uber’s $1.2 billion financing round in June was led by Fidelity, BlackRock and Wellington. The company reportedly has a deal with Goldman Sachs that requires Uber to start paying interest to the bank if it doesn’t go public in four years.

“Uber’s IPO is predestined at this point,” said Anand Sanwal, co-founder and chief executive of CB Insights, a venture capital research firm. “They are on the clock.”

Uber’s $40 billion valuation trails only Apple, Google, Facebook, Oracle, Intel, Gilead Sciences, Cisco Systems, Hewlett-Packard, eBay and Yahoo among valley companies, according to an analysis by this newspaper. Uber could raise up to $1.8 billion total with additional investments, which would push the company’s valuation to more than $41 billion. Perhaps the only funding round that comes close was Facebook’s $1.5 billion round in 2011, which valued the company at $50 billion.

Analysts say Uber must at least double its current market value at the time of its IPO to satisfy investors, which would put the company in the same league as Facebook, which was valued at $104 billion at the time of its public offering.

But there are many hurdles ahead: The company faces challenges from regulators, who have fined or banned the service in some cities. It has been criticized for its lack of safety, as in the case of a San Francisco Uber driver who allegedly beat a passenger with a hammer in September. Uber is also trying to rebuild its public image after an executive said in a private dinner that the company should do opposition research on journalists critical of its business, and it was revealed that the company can and has tracked the locations of passengers.

While some of Uber’s shenanigans may before have been easily forgiven, as a larger, public company, they may not.

“They are going to have way less wriggle room” at their current size, said Alex Lykken, senior financial writer for PitchBook, which tracks venture capital data.

And more challenges await, such as the possibility of competing apps that stymie Uber’s growth or a more intense crackdown from regulators overseas, Damodaran said.

“It looks to me like lots of things have to go right for investors to make money on this, and lots of things could go wrong,” he said. “They are walking a narrow pathway.”

The biggest stumbling block could come when Uber has to disclose its financial information when it files for an IPO. Some analysts say the filings may show the company isn’t growing as quickly as investors had bet on.

“Everything will be public, and it may not be pretty,” Hamadeh said. “We’ll find out whether they really are a multi-multi-billion-dollar company.”